FINRA members can include margin collateral in calculation of net capital. The SEC’s Division of Trading and Markets issued a no-action letter in response to the Financial Industry Regulatory Authority’s request for clarification about the treatment of collateral posted as margin under the rules of derivative clearing organizations and the rules of the prudential regulators and the Commodity Futures Trading Commission with respect to non-cleared swaps under the SEC’s net capital rule. The Division indicated that it would not recommend enforcement action against broker-dealers that do not deduct the value of margin collateral posted to a DCO for a cleared swap from net worth when computing net capital. The Division also granted no-action relief to broker-dealers that do not deduct the value of the initial margin collateral posted to a swap dealer or other counterparty for non-cleared swaps, subject to certain conditions. (8/19/2016) SEC no-action letter.
Selected Enforcement Actions
CEO, CFO misled investors about company’s performance. The SEC filed contested civil fraud charges against Global Digital Solutions, Inc., its former CEO, and its former CFO, alleging that the two officers misled investors about the company’s performance and prospects as a leader in cyber arms and security technology. The SEC claimed that the two officers issued press releases containing falsified information about Global Digital’s operations and revenue projections. Among other things, the executives claimed that Global Digital’s future annual revenue during the first quarter of 2014 would reach US$60 million to US$75 million and the company had offered to acquire one of the country’s largest arms manufacturers. In reality, Global Digital had no customers, revenues or operations and its bid to acquire the arms manufacturer had been immediately rejected. (8/12/2016) SEC v. Global Digital Solutions, Inc., SEC Lit. Release 23618.
Company’s severance agreements violated SEC’s whistleblower protection rules. The SEC announced charges against an Atlanta-based building products distributor for violating Securities Exchange Act Rules protecting whistleblowers by using severance agreements that required employees to waive their rights to receive whistleblower awards. The SEC alleged that the company included provisions in their severance agreements that forced outgoing employees to waive their rights to possible whistleblower awards or risk losing their severance payments or other benefits. The company added the provisions nearly two years after the SEC adopted Rule 21F-17, which prohibits actions that might prevent someone from communicating possible securities laws violations to the SEC. Without admitting or denying the allegations, the company settled the charges by consenting to the entry of a cease-and desist order and agreeing to pay a US$265,000 penalty. In addition, the company agreed to amend its severance agreements to clarify that employees may report possible securities laws violations without being required to forfeit any resulting whistleblower award. The company will also notify former employees who executed severance agreements after Rule 21F-17 became effective that the company does not prohibit them from reporting violations to the SEC or accepting whistleblower awards. (8/10/2016) In the Matter of BlueLinx Holdings, Inc., SEC Release No. 34-78528.
Luparello asks FINRA to review its rules for gaps in regulation of US Treasury securities. In a letter to FINRA, SEC Division of Trading and Markets Director Stephen Luparello requested that FINRA conduct a comprehensive review of its rulebook to identify current FINRA rules that exclude US Treasury securities and assess the continuing validity for such exclusions. Luparello made the request as part of the Division’s efforts to identify potential gaps in the regulatory framework for the US Treasury securities market. (8/19/2016) Luparello letter.
SEC will allow rule on principal trades with advisory clients to expire. In a letter to the Securities Industry and Financial Markets Authority, SEC Division of Investment Management Director David W. Grim indicated that the SEC will allow Rule 206(3)-3T under the Investment Advisers Act, which provides an alternative means for investment advisers that are also registered as broker-dealers to comply with Section 206(3) of the Advisers Act when acting in a principal capacity in transactions with certain advisory clients, to expire at the end of the year. (8/19/2016) Grim letter.
EDGAR updates. The SEC published the Draft EDGAR Filer Manual (Volume II) EDGAR Filing (Version 38), which contains changes that are scheduled to take effect on September 19, 2016. (8/19/2016)
Money market fund statistics. The SEC’s Division of Investment Management published money market fund statistics with data as of July 31, 2016. (8/18/2016)
SEC Investor Advocate supports PCAOB’s proposed requirements for the disclosure of critical audit matters. In a letter to the Public Company Accounting Oversight Board, SEC Investor Advocate Rick A. Fleming indicated support for the Board’s proposal to require additional disclosures of critical audit matters arising from an audit, noting that the proposed standard would improve the communication value of audit reports and make them more usable for investors. (8/15/2016) SEC Investor Advocate letter.
DERA white paper examines CMBS market. The SEC’s Division of Economic and Risk Analysis published a white paper that analyzes the concentration and interconnectedness in the CMBS market before and after the global financial crisis. (8/11/2016) DERA white paper.
Staff announcements. The SEC has appointed Kristin Snyder to serve as the Co-National Associate Director of the Investment Adviser/Investment Company examination program in the Office of Compliance Inspections and Examinations. (8/10/2016) SEC press release.